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Monday
Apr102017

IBM’s Motion to Dismiss ERISA Claims Granted

This post is the one of two posts discussing claims brought against International Business Machines Corporation (“IBM”) in 2016 regarding a seventeen percent drop in the company’s stock price. This post will specifically focus on claims brought pursuant to the Employee Retirement Income Security Act (“ERISA”). The other post covers claims brought pursuant to federal securities laws.

In Jander v. International Business Machines Corp., No. 15cv3781, 2016 BL 291159 (S.D.N.Y. Sept. 7, 2016), the United States District Court for the Southern District of New York granted IBM’s motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6) with leave to amend Larry W. Jander’s and Richard J. Waksman’s (together, “Plaintiffs”) Amended Complaint.

On behalf of participants in IBM’s 401(k) Plus Plan (the “Plan”), who invested in the IBM Company Stock Fund (the “Fund”) between January 21, 2014, and October 20, 2014, Plaintiffs brought claims against IBM and the Retirement Plans Committee of IBM, including IBM’s Chief Accounting Officer, Richard Carroll, IBM’s Chief Financial Officer, Martin Schroeter, and IBM’s General Counsel, Richard Weber (collectively, “Defendants”) pursuant to Section 502 of ERISA. The Plan permitted employees to defer compensation into various investment options, including the Fund, which was predominately invested in IBM common stock. As members of the Retirement Plans Committees, Defendants Schroeter and Weber were named as fiduciaries under ERISA. Defendant Carroll, as the Plan Administrator, was also named as a fiduciary.

In their Amended Complaint, Plaintiffs alleged that IBM’s stock price was overvalued and dropped approximately 17% as a result of the company’s divestiture announcement. Specifically, in October 2014, the company announced it was transferring its microelectronics business to another company and, consequently, it was taking a $2.4 billion write-down. Additionally, the company announced disappointing third-quarter results. Moreover, in two separate pending cases, allegations that Generally Accepted Accounting Principles (“GAAP”) required the company to record an earlier impairment of its microelectronics assets were asserted.

Defendants moved to dismiss Plaintiffs’ Amended Complaint for failure to state a claim on which relief can be granted arguing the following: (1) Plaintiffs failed to plead the microelectronics assets were impaired; (2) IBM was not a fiduciary; (3) Plaintiffs’ alternative actions assertion failed to meet the requisite standard; and (4) Plaintiffs’ duty to monitor claim was derivative of the underlying claims.

Under ERISA, fiduciaries must “‘act in a prudent manner under the circumstances then prevailing,’ a standard that eschews hindsight and focuses instead on the ‘extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed.’” In an ERISA action where a GAAP violation is alleged, the higher pleading standard required by Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act regarding scienter are not applicable. As such, the court concluded Plaintiffs’ allegations that the fiduciaries knew the company’s stock price was inflated by undisclosed material facts regarding its microelectronics business plausibly suggested an impairment and, thus, a violation of GAAP.

A threshold question in ERISA cases, however, is whether each defendant acted as a fiduciary of the plan. In addition to named fiduciaries, those who exercise “discretionary control or authority over the plan’s management, administration, or assets” are deemed de facto fiduciaries. The court reasoned that Plaintiffs’ allegations IBM was a de facto fiduciary because it had ultimate oversight over the Plan were bare legal conclusions and, therefore, failed to adequately allege that IBM was a fiduciary.

In cases in which fiduciaries allegedly “behaved imprudently by failing to act on the basis of nonpublic information that was available to them because they were . . . insiders,” pleading a breach of the duty of prudence requires a plaintiff to plausibly allege: (1) “‘an alternative action that the defendant could have taken that would have been consistent with the securities laws,’ and (2) ‘that a prudent fiduciary in the same circumstances [as Defendants] would not have viewed [the alternative action] as more likely to harm the fund than to help it.’”

First, the court determined, as Plaintiffs asserted, Defendants could have issued corrected statements regarding the valuation of the company’s microelectronics business while complying with the federal securities laws. Regarding the second prong, however, the court concluded the company could not reasonably be expected to disclose insider information or halt the Plan from further investing in the company’s stock as Plaintiffs asserted. In so finding, the court reasoned that a prudent fiduciary in Defendants’ circumstances would not have believed that such conduct would be more likely to help rather than harm the Fund.

Lastly, the court held Plaintiffs failed to adequately plead a claim for breach of duty to monitor because such claim was derivative of their claims for breach of duty of prudence, which they failed to sufficiently allege.

Accordingly, the court dismissed Plaintiffs’ claims brought pursuant to ERISA without prejudice and allowed Plaintiffs to file a Second Amended Complaint within thirty days.

Primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Apr052017

Geier v. Mozido: Motion to Dismiss Granted 

In Geier v. Mozido, No. 10931-VCS 2016 BL 321867, (Del. Ch. Sept. 29, 2016), the Court of Chancery of Delaware granted Mozido, LLC’s (“Mozido”) motion to dismiss Philip H. Geier’s (“Plaintiff”) breach of contract complaint against Mozido.  The court found that Plaintiff failed to state a claim for breach of contract under Court of Chancery Ruel 12(b)(6), as he released all claims asserted in this actions as part of a previous settlement. 

According to the allegations, representatives of Mozido had asked Plaintiff multiple times to join Mozido’s Board of Directors (the “Board”).  In March 2012, Plaintiff agreed to join the Board in exchange for 1% of the then issued and outstanding membership units in Mozido (the “Options”).  Plaintiff served on the Board until his resignation in May 2013.  In July 2012, Modizo needed to raise capital, and Plaintiff had the Philip H. Geier Irrevocable Trust (the “Geier Irrevocable Trust”) and The Geier Group, LLC (the “Geier Group”) loan $3 million to Mozido. Upon default of the note, the Geier Group and the Geier Irrevocable Trust sought action against Mozido and members of the Board who had guaranteed the loan. 

In November 2013, a General Release agreement was executed.  Geier Irrevocable Trust and Geier Group were named releasors, and the agreement contained a carve out claim for any claims by Plaintiff with respect to the Options.  Plaintiff alleged he demanded that Mozido issue his Options and was not able to exercise the Options since his departure from the Board.  Plaintiff, however, only made a formal demand to exercise the Options in October 2014. 

Plaintiff alleged the General Release was inapplicable to the claims regarding the Options.  He asserted that the release should not apply to him because it related only to claims arising from the $3 million loan of the Geier Trust and the Geier Group.  Alternatively, he was not “an intended releaser”. 

A motion to dismiss under Rule 12(b)(6) should be denied if a plaintiff “could recover under any reasonably conceivable set of circumstances susceptible of proof.”  Therefore, Plaintiff must sufficiently prove he can recover the Options with the court assuming the truth of all well-pled facts in the complaint and drawing reasonable inferences in Plaintiff’s favor. 

The court found that the General Release agreement extended to Plaintiff as an individual and released his claims against Mozido related to the Options.  The court first evaluated the General Release itself, and found when the language of the release was clear and unambiguous.  In addition, the court declined to read the General Release in conjunction with the settlement.  Instead, “[t]he General Release must be interpreted within its four corners.” As for the contention that Plaintiff was not subject to the release, the court concluded that he controlled the Geier Irrevocable Trust and the Geier Group.  Moreover, even if he did not, he constituted an “affiliate” and was therefore covered by the General Release. 

For the above reasons, the Court of Chancery of Delaware granted Mozido’s motion, dismissing Plaintiff’s claim. 

The primary material for this case may be found on the DU Corporate Governance website.

Monday
Apr032017

No-Action Letter for Microsoft Permitted Exclusion of Vague Shareholder Voting Proposal.

In Microsoft Corp., 2016 BL 339357 (Oct. 7, 2016), Microsoft Corporation (“Microsoft”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Kenneth Steiner (“Shareholder”) requesting that the board “not take any action whose primary purpose is to prevent the effectiveness of shareholder vote without a compelling justification for such action.” The SEC agreed to issue a no action letter allowing for the exclusion of the proposal under Rule 14a-8(a)(3).

Shareholder submitted a proposal providing that:

RESOLVED, the board shall not take any action whose primary purpose is to prevent the effectiveness of shareholder vote without a compelling justification for such action.

Microsoft sought exclusion under subsections (a), (i)(3) and (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(a) permits exclusion of shareholder proposals that “seek no specific action, but merely purport to express shareholder views.” Proposals that do not request specific action it the future, but act prophylactically, are subsequently excluded.

Rule 14a-8(i)(3) permits the exclusion of proposals or supporting statements that are contrary to any of the SEC’s proxy rules or regulations. The subsection applies to proposals that may be inconsistent with Rule 14a-9, which prohibits materially false or misleading statements. 17 CFR 240.14a-9. In addition, this subsection permits the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.  

Rule 14a-8(i)(7) permits the exclusion of proposals that relate to a company’s “ordinary business” operations. This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Thus, proposals dealing with issues relating to ordinary business are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7).

Microsoft argued the proposal should be excluded under subsection (a) because the proposal was not a proposal for the purposes of Rule 14a-8. The proposal did not request that the board take a specific action in the future. Instead, the proposal only “directs the board to decline to take action.” Thus, the proposal does not seek any specific action and may be excluded under Rule 14a-8(a).  

Microsoft further argued the proposal should be excluded under subsection (i)(3) because the proposal was impermissibly vague and indefinite. Specifically, Microsoft argued the proposal was so vague that “neither the company nor its shareholder can determine what types of conduct the Submission is intended to address.”

Finally, Microsoft asserted the proposal should be excluded under subsection (i)(7) because the proposal related to the Company’s ordinary business operations. Even if there were board actions in the proposal that may implicate social policy issues, the proposal encompassed activities regarding the company’s interactions with shareholders, which relates to its ordinary business operations.

In response, Shareholder argued the board of directors undermined the shareholder franchise (i.e. adopting complex notices, requiring long forms that often demand proprietary information to the board, etc.), which results in deterred shareholder votes and costly litigation to Microsoft.

The SEC agreed with Microsoft’s reasoning, and concluded it would not recommend enforcement action if Microsoft omits the proposal from its proxy materials in reliance on Rule 14a-8(i)(3). The staff noted “neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.” The staff did not address Microsoft’s alternative bases for omission.

The primary materials for this post can be found on the SEC website.

Monday
Apr032017

Janvey v. Golf Channel: Objective Value Provided Prevails Over Ponzi Claims

In Janvey v. Golf Channel, Inc., No. 13-11305, 2016 BL 272349 (5th Cir. Aug. 22, 2016), the United States Court of Appeals for the Fifth Circuit affirmed the district court’s decision denying summary judgment to Janvey, the court-appointed receiver for Stanford International Bank, (“Plaintiff”) and granting summary judgment to Golf Channel (“Defendant”) allowing Golf Channel to retain the $5.9 million paid by Stanford International Bank for advertising services.

According to the allegations, the Golf Channel had an advertising contract with Stanford International Bank worth over $5.9M. After the SEC exposed Stanford International Bank’s Ponzi scheme, the court appointed a receiver, Janvey, to recover fraudulent transfers.  Janvey contended, relying on the Texas Uniform Fraudulent Transfer Act (“TUFTA”), that the payments made to Golf Channel did not benefit the investors or creditors, even though the advertising services would be “valuable” to another business. The district court granted Golf Channel’s motion for summary judgment based on its interpretation of TUFTA and the affirmative defense by the Golf Channel that the payments received were “in good faith and for a reasonably equivalent value.” Under TUFTA, a creditor can recover transfers made with the intent to defraud unless the transferee establishes that the transfers were received in good faith and for reasonable equivalent value. The Supreme Court of Texas certified that the inquiry of “value” under TUFTA does not depend on whether the debtor was operating a Ponzi scheme, but whether “the services would have been available to another buyer at market rates.” Other states’ fraudulent transfer laws and section 548(c) of the Bankruptcy Code examine “the degree to which the transferor’s net wealth is preserved,” but TUFTA does not.

In early 2015, the Fifth Circuit initially reversed the district court’s judgment, based on its interpretation of TUFTA finding that “the payments to Golf Channel were not for “value” because Golf Channel’s advertising services could only have depleted the value of the Stanford estate and thus did not benefit Stanford’s creditors.”  In response to the Golf Channel’s petition for rehearing, the court certified a question to the Texas Supreme Court on what constitutes “value.”  The Texas Supreme Court reasoned that the Golf Channel’s advertising had objective “value and utility from a reasonable creditor’s perspective at the time of the transaction, regardless of Stanford’s financial solvency at the time.” Janvey v. Golf Channel, Inc., 487 S.W.3d 560 (Tex. 2016).

Based on the opinion from the Texas Supreme Court, the appeals court affirmed the district court’s judgment for the Defendant.

The primary materials for this case may be found on the DU Corporate Governance website.

Monday
Apr032017

Holtz v. JPMorgan Chase Bank: Court Affirms Motion to Dismiss Under SLUSA

In Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir. 2017), the United States Court of Appeals for the Seventh Circuit affirmed the district court’s ruling granting JPMorgan Chase Bank (“JPMorgan Chase”) and all its affiliates motion to dismiss under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The Seventh Circuit held Patricia Holtz (“Plaintiff”) and a group of similarly situated investors could not invoke state contract and fiduciary principles to bring a suit under the Class Action Fairness Act, since her claim rested on an “omission of material fact” and thus SLUSA preempted.

The complaint alleged that JPMorgan Chase “proclaim[ed]” on its website to make investment recommendations on the basis of the clients’ best interest.  As Plaintiff alleged, JPMorgan Chase gave its employees incentives to place clients’ money in the banks own mutual funds, even when those funds had higher fees or lower returns than competing funds sponsored by third parties. Plaintiff maintained JP Morgan Chase “violated its promises and its fiduciary duties by inducing its investment advisers to make recommendations in the Bank's interest rather than the clients”. 

Plaintiff filled suit under the Class Action Fairness Act.  Seeking to avoid invoking federal law, Plaintiff framed her claim entirely under state contract and fiduciary principles. Plaintiff asserted that JPMorgan “failed to provide the independent research, financial advice, and due diligence required by the parties’ contract and their fiduciary relationship.”

Where the plaintiff alleges “a misrepresentation or omission of material fact in connection with the purchase or sale” of a security, the claim must  proceed exclusively under the federal securities laws. The purpose of the SLUSA is to prevent persons injured by securities transactions from engaging in “artful pleading or forum shopping” in order to evade the limits prescribed to securities litigation.

Noting that mutual funds were securities, the Seventh Circuit quickly characterized the matter as a “covered class action” for purposes of the SLUSA.   Plaintiff, however, argued that SLUSA did not apply because the claim was not based upon false statements or omissions. The court, however, concluded that the suite depended upon the “assertion that the Bank concealed the incentives it gave its employees.”  As a result, nondisclosure was “a linchpin of this suit no matter how [Plaintiff] chose to frame the pleading.” Nor did the absence of allegations of scienter change the result.  “Every other circuit that has addressed the question likewise has held that a plaintiff cannot sidestep SLUSA by omitting allegations of scienter or reliance.

The court also expressed unwillingness to treat contract claims involving securities as somehow taking the claim outside of SLUSA.  Such an approach would “[a]llow[] plaintiffs to avoid [SLUSA] by contending that they have ‘contract’ claims about securities, rather than ‘securities’ claims” thereby rendering SLUSA “ineffectual, because almost all federal securities suits could be recharacterized as contract suits about the securities involved.”

The court also found that the claims occurred “in connection with” the purchase or sale of a covered security. The alleged omissions were made in connection with an impeding investment decision, rather than with a record-keeping decision. Finally, SLUSA did allow for state law claims in which the misrepresentation or omissions were not material to the transaction, but Plaintiff did not argue JPMorgan Chase’s incentives to its employees were too small to be “material” under the statute.

Accordingly, the Seventh Circuit affirmed the District Court’s ruling granting JPMorgan’s motion to dismiss. Dismissal did not, however, mean that the case could not be maintained elsewhere.  As the court reasoned:

If she wants to pursue a contract or fiduciary-duty claim under state law, she has only to proceed in the usual way: one litigant against another. The Litigation Act is limited to “covered class actions,” which means that Holtz could litigate for herself and as many as 49 other customers.  What she can't do is litigate as representative of 50 or more other persons when the suit involves “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security”. If the Bank did wrong by its customers, the SEC could file its own suit (or open an administrative proceeding) without regard to the Litigation Act—and the Commission sometimes can obtain relief without showing scienter. What's more, states and their subdivisions can litigate in state court; the Litigation Act exempts them.  Thus there are plenty of ways to bring wrongdoers to account—but a class action that springs from lies or material omissions in connection with federally regulated securities is not among them. (citations omitted). 

The primary material for this case may be found on the DU Corporate Governance Website

Sunday
Apr022017

No-Action Letter for International Business Machines Corp. Allowed Exclusion of Proposal Requesting Resignation of the Company’s Chief Executive Officer.

In International Business Machines Corp., 2016 BL 382928 (Nov. 16, 2016), International Business Machines Corporation (“IBM”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by shareholder, Joseph B. Tadjer (“Shareholder”) requesting the resignation of IBM’s current Chief Executive Officer, Virginia Rometty (“Rometty”). The SEC agreed to issue a no action letter allowing IBM to exclude the proposal under Rule 14a-8(i)(7).  

Shareholder submitted a proposal providing that: 

RESOLVED, I proposed, in the form of a nonbinding resolution, that Virginia Rometty resign her position as chief executive officer of the Company as soon as is practical and convenient. Under my proposal Mrs. Rometty's status as a member and chairman of the Board of Directors would not be affected.

IMB sought exclusion of the proposal under Rule 14a-8(i)(7).

Rule 14a-8 provides shareholders with the right to insert a proposal in companies’ proxy materials 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Subsection (i)(7) permits exclusion of shareholder proposals that involve matters pertaining to “ordinary business” operations, including “management of the workforce” and “termination of employees.” This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Ordinary business matters are a fundamental component of management’s role in effectively running the company on a daily basis, and thus are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

IMB argued Shareholder’s proposal seeks to remove the Chief Executive Officer and therefor relates to ordinary business matters involving employment policies.  In addition, as senior management, the CEO’s role included directing and overseeing the company’s operations. In the event of resignation, IMB would have difficulty finding a replacement because future office holders would not want to hold a position “micro-manage[d]” by shareholders.

In response, Shareholder urged that his proposal does not require the company to enforce CEO’s retirement. Rather, the proposal sought to provide the board with the views of shareholders on the leadership of the company. Shareholder emphasized that, if the company chose to act on the majority vote, the company could determine the timing of the CEO’s retirement.  Moreover, under the Proposal, nothing prevented the CEO from maintaining her Board position.

The SEC agreed with IBM’s reasoning, and concluded IBM may exclude Shareholder’s proposal under Rule 14a-8(i)(7). The staff noted the proposal related to ordinary business matters because it involved the “termination, hiring, or promotion of employees.”

The primary materials for this post can be found on the SEC Website

Sunday
Apr022017

West Virginia Pipe Trades Wealth & Welfare Fund v. Medtronic, Inc.: Scheme Liability Claim Timely and Not Barred as Matter of Law

In W. Va. Pipe Trades Health & Welfare Fund v. Medtronic, Inc., 845 F.3d 384 (8th Cir. 2016), the Court of Appeals for the Eighth Circuit vacated the United States District Court for the District of Minnesota’s grant of Medtronic, Inc.’s (“Defendant”) motion for summary judgment against West Virginia Pipe Trades Health and Welfare Fund, Employees’ Retirement System of the State of Hawaii, and Union Asset Management Holding AG (collectively “Plaintiffs”), and remanded the case for further proceedings. The court held Plaintiffs’ scheme liability claim was not time barred, nor was it barred as a matter of law.

According to the allegations, Defendant developed INFUSE, an alternative bone grafting procedure, and obtained approval by the Food and Drug Administration (the “FDA”) in 2002 for use in lower back spinal fusion surgeries. In 2008, The FDA issued a public health notification following the discovery that up to 85% of INFUSE use was off-label. In 2010, several independent physicians published articles expressing concern that clinicians running clinical studies on the drug did not disclose medical risks associated with INFSUE due to financial ties with the Company.  On June 22, 2011, the Senate Finance Committee (the “Committee”), concerned over the allegations raised regarding Defendant’s relationship with the physicians, announced an investigation into Defendant and INFUSE. In October 2012, the Committee issued a report that, among other things, concluded that Defendant “was heavily involved in drafting, editing, and shaping the content of medical journal articles authored by its physician consultants who received significant amounts of money through royalties and consulting fees from” Defendant.

On June 27, 2013, Plaintiffs filed a complaint alleging various violations, including false statement and scheme liability claims against Defendant, its officers, and the physicians. The district court dismissed Plaintiffs’ scheme liability claims against the physicians and dismissed some of the false statement claims against Defendant; however, it left three claims intact. Defendant moved for, and the district court granted, summary judgment against the remaining claims.  The court held the two-year statute of limitations barred the claims. On appeal by Plaintiffs for the scheme liability claim, Defendant sought dismissal, arguing Plaintiffs claims were barred because the claim “attempts to hold Defendant secondarily liable for the fraudulent statements of others.”

Under 28 U.S.C. § 1658(b), a scheme liability claim will be barred two years after discovery of the facts or five years from the date of the violation.  With respect to the two year period, discovery requires a showing that plaintiff could, through reasonable diligence, find sufficient information to plead scienter with regard to the alleged deceptive acts. Rule 10b-5 states it is unlawful “to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5.

The Eighth Circuit Court found Plaintiffs timely filed their complaint. The court held Plaintiffs had not discovered facts demonstrating scienter until the Committee issued their report in October 2012. The court acknowledged Plaintiffs had reason to be suspicious of Defendant’s actions giving rise to a scheme liability claim prior to the investigation and report; however, only upon issuance had Plaintiffs discovered the facts necessary to pursue a scheme liability claim.

The court also found that Plaintiffs had adequately alleged a claim for scheme liability claim under Rule 10b-5. The Defendant asserted that the facts asserted by Plaintiffs set out a claim for aiding and abetting.  While the Securities and Exchange Commission could bring such a claim, private parties could not.  The court, however,  held that Plaintiffs claim sufficiently alleged a direct claim for scheme liability.  As the opinion provided:  “Paying someone else to make a misrepresentation is not itself a misrepresentation.”

Finally, Defendant argued that Plaintiffs had not sufficiently alleged reliance.  Defendant argued that Plaintiffs failed to demonstrate a causal connection between Defendant’s alleged deceptive acts and the information used by the market. The court, however, disagreed, finding that the “causal connection between [Defendant’s] alleged deceptive conduct and the information on which the market relied is not too remote to support a finding of reliance.”  Specifically, the court determined that investors had relied on the favorable results of the clinical trials and Defendant’s CEO referenced the clinical trials when speaking to investors.

Accordingly, the court vacated the order granting Defendant’s motion for summary judgment and remanded the case with Plaintiffs’ scheme liability claim intact.

The primary materials for this case may be found on the DU Corporate Governance website.

Sunday
Apr022017

No-Action Letter for American Express Company Allowed Exclusion of Proposal Requesting CEO and Named Directors Not to Serve Other Companies with Payment 

In American Express Co., 2016 BL 429743 (Dec. 22, 2016), American Express Co. (“AmEx”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit exclusion of a proposal submitted by shareholder Jing Zhao (“Zhao”) requesting that AmEx require the CEO and other named executive officers not to serve on the board or within the organizations of other companies for payment. The SEC agreed to issue a no-action letter allowing exclusion of the proposal under Rule 14a-8(i)(7).

Zhao submitted a proposal providing that:

     RESOLVED: “Shareholders recommend that American Express Company request the CEO not to serve   other companies with payment. This policy should also apply to other Named Executive Officers.”

AmEx sought exclusion of the proposal from its proxy materials under subsection (i)(7) of Rule 14a-8.

Rules 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, proposals may be excluded under one or more of the thirteen substantive exclusions. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(i)(7) permits the exclusion of proposals dealing with matters relating to the company’s “ordinary business” operations. The term “ordinary business” refers to those business matters confined to resolution by management and the board of directors. Thus, proposals relating to “ordinary business” matters are not subjected to shareholder oversight. For additional explanation of this exclusion see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).

AmEx argued for exclusion under Rule 14a-8(i)(7) because the proposal interfered with daily operations and micromanaged the company by identifying specific qualifications for officers. AmEx also emphasized that the staff had long recognized “limits on employees’ board service” as a matter of ordinary business. Additionally, AmEx argued the proposal did not “transcend the day-to-day business matters” of the company, and therefore did not address significant policy issues warranting inclusion in its proxy materials.

Zhao disagreed, arguing his proposal did not pertain to ordinary business matters. Zhao also  contended that the proposal raised significant policy issues because the CEO’s alleged conduct as a member of other boards violated AmEx’s Code of Conduct regarding Conflicts of Interest.

The SEC agreed with AmEx and concluded it would not recommend enforcement action if AmEx omits the proposal from its proxy materials in reliance on rule 14a-8(i)(7). The SEC noted “the proposal relates to specified employees’ ability to serve outside organizations.”

The primary materials for this case may be found on the SEC website.

Saturday
Apr012017

In Re SLRA: SEC Accepts Offers of Settlement in Cease-and Desist Proceedings against SLRA and Scott Landress

In In the Matter of SLRA Inc., Investment Advisors Act Release No. 4641 (admin proc Feb. 7, 2017), the Securities and Exchange Commission (the “SEC”) filed an order instituting administrative and cease-and-desist proceedings against SLRA Inc. (“SLRA”), as successor entity to Liquid Realty Advisors III, LLC (“LRA III”) and Scott Landress (“Landress”) (collectively, “Respondents”) for alleged violations of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Respondents submitted Offers of Settlements (the “Offers”), which neither admitted nor denied the allegations, which the SEC accepted.

According to the SEC’s allegations, between 2009 and 2011, Landress sought additional compensation from the limited partners of two funds (the “Limited Partners”), Liquid Realty Partners III, L.P. and Liquid Realty Partners III-A, L.P. (collectively, the “Funds”) and from the advisers to the Funds, SLRA and its predecessor LRA III.  The Limited Partners refused the requests. On January 7, 2014, Landress, as the controlling member of SLRA and the general partner, directed the transfer of £16.25 million from the Funds’ accounts to SLRA. On February 3, 2014, Landress informed the Limited Partners the withdrawals covered fees owed to an affiliate for services provided to the Funds from 2006 through 2013 (the “Service Fees”). In March 2014, Landress transferred the money to a personal account.

Landress claimed the operating documents of the Funds and an oral agreement made in 2006 allowed the related party transactions. The SEC determined Landress did not disclose the oral agreement, the Service Fees, or the related party transactions and conflicts of interest until 2014. Additionally, the SEC alleged Landress misrepresented to the Advisory Committee created by each limited partnership agreement that the Funds’ auditors “advised [the General Partner] in conversations that the Service Fee need not have been disclosed per GAAP standards.” Lastly, the SEC determined Respondents breached their fiduciary duty by withdrawing the funds and failing to disclose the existence of the Service Fees, which ultimately prevented the Limited Partners from making informed investment decisions.

Sections 206(1), 206(2), 206(4) and Rule 206(4)-8 of the Advisers Act “prohibit making an untrue statement of a material fact or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, to any investor . . . in the pooled investment vehicle and engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.”

In light of the allegations, the SEC determined to impose sanctions.  Accordingly, the SEC ordered Respondents to cease-and-desist from “committing or causing any violations and any future violations of Sections 206(1), 206(2), 206(4) of the Advisors Act and Rule 206(4)-8 thereunder.” SLRA received censure. Landress was barred from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter. The Commission also assessed a penalty against Landress of $1,250,000. 

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Mar312017

No-Action Letter for WGL Holdings, Inc. Prevents Exclusion of Proposal 

In WGL Holdings, Inc., 2016 BL 403312 (Nov. 29, 2016), WGL Holdings (“WGL”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by As You Sow on the behalf of shareholder Samajak LP ("Samajak").  The proposal requested that WGL develop a report quantifying the financial risk posed by methane leaks in its natural gas infrastructure.  The SEC denied the requested no-action letter, concluding that WGL may not exclude Samajak’s proposal from its annual proxy statement under subsections (i)(6), (i)(7), and (j)(1) of Rule 14a-8.

Shareholder submitted a proposal providing:

RESOLVED: As You Sow, on behalf of WGL shareholders, requests that the company develop a report quantifying the financial risk that methane leaks in its natural gas infrastructure pose to the Company and its investors. Shareholders request that the report estimate a) the likely cost of climate change related regulation of its methane leaks, and b) estimate the likelihood, brand damage, and cost of potential catastrophic explosions. The report should exclude proprietary information and be published by September 2018.

WGL sought exclusion of the proposal from its proxy materials under subsections (i)(6) and (i)(7) of Rule 14a-8. WGL also sought a waiver of the requirements under subsection (j)(1) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule provides companies thirteen substantive grounds for exclusion of the proposal. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(i)(6) allows the exclusion of a shareholder proposal if the company lacks the power and authority to implement the proposal. Specifically, a company can exclude a proposal if the required action may breach existing contractual obligations.

Rule 14a-8(i)(7), allows the exclusion of a shareholder proposal if the proposal deals with matters relating to the company’s “ordinary business” operations. This section understands “ordinary business” to mean the issues that are fundamental to the company’s management abilities on a daily basis. Thus, proposals relating to “ordinary business” are not subjected to shareholder oversight. Specifically, a company can exclude a proposal relating to the company’s compliance with law. For additional explanation of this exclusion see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).

Rule 14a-8(j)(1) allows the company to submit reasons for excluding the proposal later than 80 days before the company files its definitive proxy statement and form of proxy, if the company demonstrates good cause for missing the deadline.

WGL argued for exclusion under subsection (i)(6) because the company lacked the power or authority to implement the proposal. WGL pointed to previous staff letters allowing for exclusion where the proposal could require a company take action that could breach an existing contractual obligation.  WGL claimed the proposal required the company to release information to third parties about an accident or incident subject to an ongoing investigation by the National Transportation Safety Board (“NTSB”). The NTSB was investigating the August 11, 2016 explosion and fire at a property on Arliss Street in Silver Spring, Maryland. Until the NTSB published the final report, WGL could not disclose the probable cause of the accident and could not force the NTSB to publish a preliminary report.

WGL also argued for exclusion under subsection (i)(7) because the proposal related to the company’s compliance with laws relating to methane. Specifically, WGL asserted that the proposal “attempts to impose on the Company an obligation to re-examine its compliance with laws and regulations.” WGL further argued that the proposal’s references to “greenhouse gases” and “financial risk” did not rise to the level of significant public policy.

Finally, WGL argued the 80-day deadline under subsection (j)(1) should be waived because the company moved the annual meeting date to one month earlier than in 2016, and the company only had 93 days between the deadline to submit shareholder proposals and filing definitive proxy materials. WGL submitted the no-action request only three days short of the 80-day deadline.

The SEC disagreed with WGL’s reasoning and concluded WGL may not omit the proposal from its annual proxy statement in reliance on Rule 14a-8(i)(6) because WGL “does not lack the power or authority to implement the proposal.” The staff further concluded WGL may not omit the proposal in reliance on subsection (i)(7). Finally, the staff concluded WGL did not file its statement of objections to including the proposal at least 80 days before the filing date. The staff noted that under the circumstances, the 80-day deadline requirement was not waived.

The primary materials for this case may be found on the SEC website.

Friday
Mar312017

No-Action Letter for Apple, Inc. Denied Exclusion of Request for Apple to Retain Additional Compensation Consultants

In Apple Inc., 2016 BL 360609 (Oct. 26, 2016), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Jing Zhao (“Shareholder”) requesting that Apple retain additional independent compensation consultants to reform its executive compensation policies. The SEC declined to issue a no action letter, concluding Apple could not exclude the proposal under Rules 14a-8(i)(3), 14a-8(i)(6), or 14a-8(i)(7). 

Shareholder submitted a proposal providing that: 

RESOLVED, shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.

Apple sought exclusion under subsections (i)(3), (i)(6), or (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC (2016).

Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to any of the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it.

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if the proposal relates to the company’s “ordinary business operations.” This section understands that certain tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” The staff considers “the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

Apple argued for exclusion under Rule 14a-8(i)(3) because the proposal failed to define “Outside Independent Experts,” “Resources,” and “General Public.” Absent definitions, these terms subjected the proposal to multiple interpretations regarding the manner of implementation.  Apple also asserted that the proposal was ambiguous to whom it applied – the company or the board of directors. 

Apple also sought exclusion under Rule 14a-8(i)(6) because the company lacked the power to implement the proposal. Specifically, the implementation would cause the company to violate SEC rules relating to compensation committees, as well as the listing standards of the NASDAQ stock market, the principal exchange for Apple’s shares.

Apple further argued for exclusion under Rule 14a-8(i)(7) because the proposal urged the company to change the process for making compensation decisions.  Therefore, the proposal sought to mandate a hiring decision, which the staff consistently allowed exclusion of under subsection (i)(7). 

In response, Shareholder argued that the key terms were defined or commonly used words.  Moreover, any lack of specific definitions gave the company flexibility in implementing the proposal. In addition, Shareholder argued the company had the power and authority to implement the proposal without violating applicable laws and rules. Finally, Shareholder urged the proposal dealing with compensation policies was not related to the company’s hiring decisions, and thus was not an ordinary business matter. 

The SEC disagreed with Apple’s arguments, and concluded Apple may not omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(3), (i)(6), or (i)(7). The staff noted the proposal was not “so inherently vague or indefinite” that the shareholders or the company would not be able to determine exactly what actions or measures the proposal requires. In addition, the staff did not agree with Apple that the company lacked the power or authority to implement the proposal. While the proposal focused on senior executive compensation, the staff determined it could not be excluded as ordinary business matters.

The primary materials for this no action letter can be found on the SEC Website.

Friday
Mar312017

Bartko v. SEC: Retroactive Application of the “Collateral Bar” under Dodd-Frank.

In Bartko v. SEC, 845 F.3d 1217 (D.C. Cir. 2017), Gregory Bartko petitioned the United States Court of Appeals for the District of Columbia Circuit for review of an order from the Commission imposing a collateral bar that prohibited association with six classes of securities market participants. The Court granted in part and denied in part Bartko’s petition, finding that the Commission had impermissibly applied the collateral bar retroactively. 

According to the allegations, Bartko was convicted of, among other things, selling unregistered securities. An Administrative Law Judge (“ALJ”) further recommended that Bartko be barred from associating with not only broker-dealer classes, but also investment advisers, municipal securities dealer, and transfer agent classes. The Commission affirmed the ALJ’s Order, and further extended the collateral bar to include municipal advisors and nationally recognized rating’s organization (“NRSRO”) classes. 

Bartko argued on appeal that, because his conduct had occurred prior to the adoption of Dodd-Frank, the imposition of a bar represented the application of an impermissible retroactive penalty. 

The Commission has the authority to impose a collateral bar in section 203(f) of the Investment Advisers Act of 1940, and section 15(b) of the Securities Exchange Act of 1934. Generally, to impose this sanction the Commission must demonstrate; (1) the penalty was in the public interest, (2) the participant was convicted of a specified offense within the last ten years or had been enjoined by the Commission from working in the industry, and (3) the participant was associated with – or was attempting to be associated with – one of the classes either at the time of the alleged misconduct or at the time of registration. 

In Teicher v. SEC, 177 F.3d 1016, 1019-20 (D.C. Cir. 1999), the court found that the Commission could only bar associations where the defendant had a nexus. Dodd-Frank, however, altered the holding by empowering the Commission to grant collateral bars to all six classes, even absent a nexus. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 11-203, 124 Stat. 1376 (2010). 

The Due Process Clause generally imposes a presumption against the retroactive application of legislation to events completed prior to enactment. This presumption is only overcome by clear Congressional intent to the contrary. Here, the Court found that Congress did not expressly authorize the retroactive application of the extended collateral bar created by Dodd-Frank. Moreover, the court found that the changes constituted “new legal consequences” that could not be characterized as procedural. As a result, the Commission lacked the ability to apply the bars retroactively and could not, therefore, bar Bartko from association with the investment adviser, municipal securities dealer and transfer agent classes. 

Accordingly, Bartko succeeded in his petition that challenged the investment advisor, municipal securities, and transfer agent bar classes. The remainder of Bartko’s petition was denied.

The primary material for this case can be found on the DU Corporate Governance Website

Friday
Mar312017

No-Action Letter for Apple, Inc. Denied Exclusion of Request for Apple to Retain Additional Compensation Consultants

In Apple Inc., 2016 BL 360609 (Oct. 26, 2016), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Jing Zhao (“Shareholder”) requesting that Apple retain additional independent compensation consultants to reform its executive compensation policies. The SEC declined to issue a no action letter, concluding Apple could not exclude the proposal under Rules 14a-8(i)(3), 14a-8(i)(6), or 14a-8(i)(7).

 

Shareholder submitted a proposal providing that:

           

RESOLVED, shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.

 

Apple sought exclusion under subsections (i)(3), (i)(6), or (i)(7) of Rule 14a-8.

 

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC (2016).

 

Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to any of the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

 

Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it.

 

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if the proposal relates to the company’s “ordinary business operations.” This section understands that certain tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” The staff considers “the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

 

Apple argued for exclusion under Rule 14a-8(i)(3) because the proposal failed to define “Outside Independent Experts,” “Resources,” and “General Public.” Absent definitions, these terms subjected the proposal to multiple interpretations regarding the manner of implementation.  Apple also asserted that the proposal was ambiguous to whom it applied – the company or the board of directors.

 

Apple also sought exclusion under Rule 14a-8(i)(6) because the company lacked the power to implement the proposal. Specifically, the implementation would cause the company to violate SEC rules relating to compensation committees, as well as the listing standards of the NASDAQ stock market, the principal exchange for Apple’s shares.

 

Apple further argued for exclusion under Rule 14a-8(i)(7) because the proposal urged the company to change the process for making compensation decisions.  Therefore, the proposal sought to mandate a hiring decision, which the staff consistently allowed exclusion of under subsection (i)(7).

 

In response, Shareholder argued that the key terms were defined or commonly used words.  Moreover, any lack of specific definitions gave the company flexibility in implementing the proposal. In addition, Shareholder argued the company had the power and authority to implement the proposal without violating applicable laws and rules. Finally, Shareholder urged the proposal dealing with compensation policies was not related to the company’s hiring decisions, and thus was not an ordinary business matter.

 

The SEC disagreed with Apple’s arguments, and concluded Apple may not omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(3), (i)(6), or (i)(7). The staff noted the proposal was not “so inherently vague or indefinite” that the shareholders or the company would not be able to determine exactly what actions or measures the proposal requires. In addition, the staff did not agree with Apple that the company lacked the power or authority to implement the proposal. While the proposal focused on senior executive compensation, the staff determined it could not be excluded as ordinary business matters.

 

The primary materials for this no action letter can be found on the SEC Website.

 

Friday
Mar312017

In Re Windsor Street Capital: Cease-and-Desist Proceedings against John Telfer and Windsor Street Capital

In In re Windsor Street Capital L.P., S.E.C., No. Admin. Proc. File No. 3-17813, Jan. 25, 2017, the Securities and Exchange Commission (“SEC”) filed an order instituting administrative and cease-and-desist proceedings against John Telfer (“Telfer”) and Windsor Street Capital, L.P. (“Windsor”) (f/k/a Meyers Associates, L.P.) (“Meyers”) (collectively, “Defendants”) for alleged violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“1933 Act”) and Rule 17a-8 thereunder, and Section 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”).

According to the SEC’s allegations, from January to October 2014, Meyers violated Section 5 of the 1933 Act by engaging in the unregistered sales of hundreds of millions of penny stock shares on behalf of customers Barton and Goode (“Customers”) without first performing a reasonable inquiry of whether the stock sales complied with Section 5. None of the stock sales were registered with the Commission. Meyers accepted all Customers’ representations as true without further inquiry, even though there were multiple red flags. Meyers failed to file suspicious activity reports (“SARs”) regarding the suspicious penny stock sale transactions, as required by the Bank Secrecy Act of 1970 (“BSA”), which resulted in proceeds of at least $24.8 million. Meyers earned at least $613,000 in commissions and fees for the suspicious, illegal penny-stock transactions. The SEC alleged Meyers willfully violated Section 5(a) and 5(c) of the 1933 Act, and Section 17(a) of the Exchange Act and Rule 17a-8.

Respondent Telfer, according to the allegations, became associated with Meyers in September 2013, and served as Meyer’s chief compliance officer (“CPO”) and anti-money laundering (“AML”) officer from November 2013 until his separation from the firm in September 2016. The SEC alleged that Telfer failed to monitor customer transactions and failed to file SARs, which caused Meyers’ violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.

Regulations adopted under the BSA require broker-dealers to file SARs with FinCEN when transactions involve funds or other assets of at least $5,000, and the broker-dealer knows, suspects, or has reason to suspect that the transaction “involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities . . . as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation.” The Exchange Act Rule 17a-8 requires broker-dealers to comply with the SAR rule. Rule 144, safe harbor, exempts stock sales from Section 5 if the customer is not affiliated with the issuer, held the stock for more than a year, and the issuer is not a shell company.

In light of the SEC’s investigation and allegations, the SEC deemed it appropriate in the public interest to begin public administrative and cease-and-desist proceedings to determine the validity of the allegations, and to determine if any remedial action would be appropriate, including but not limited to disgorgement and civil penalty. The SEC ordered a public hearing before an Administrative Law Judge to take evidence, and ordered Defendants to file an answer to the allegations contained in the order.

The primary materials for this case may be found on DU Corporate Governance website.

Monday
Mar062017

No-Action Letter for Cabela’s Inc. Allowed Exclusion of Handgun Sale Proposal 

In Cabela’s Inc., 2016 BL 112584 (April 7, 2016), Cabela’s Inc. (“Cabela’s”) asked the staff of the Securities and Exchange Commission to permit the omission of a proposal submitted by The Rector, Church-Wardens and Vestrymen of the Trinity Church of New York City (“Trinity”) requesting that Cabela’s discontinue the sale of handguns that can hold more than eight shells to the general public, while the sale may continue to military and law enforcement personnel. The SEC issued the requested no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(7). 

Trinity submitted a proposal providing that: 

RESOLVED: Consistent with the Company's commitment in its Business Code of Conduct & Ethics to "make business decisions not based only on financial risk and reward, but also on the impact to people, communities and the environment," and with Cabela's being a store for outdoor enthusiasts and their families, shareholders ask the Board of Directors to adopt and oversee the implementation of a policy to continue to sell handguns and rifles discharging up to eight shells without reloading, weapons connected to the sports of hunting and marksmanship, and not to sell (other than to police departments and other military and law enforcement agencies of government) firearms capable of discharging more than 8 shells without reloading, the weapons of choice for mass killings and illegal gun violence ("high-capacity weapons"). 

Cabela’s argued the proposal may be excluded from the company’s proxy materials under subsections (i)(7) and (i)(3) of Rule 14a-8.   

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.  

Rule 14a-8(i)(7) permits the exclusion of proposals that relates to the company’s “ordinary business” operations, specifically in reference to a company’s sale of particular products and services. This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Thus, proposals dealing with issues dealing in “ordinary business” are not subjected to shareholder oversight.  For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016). 

Additionally, Rule 14a-8(i)(3) permits the exclusion of proposals that are contrary to any of the SEC’s proxy rules or regulations. Namely, (i)(3) applies to proposals that may be inconsistent with Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. 17 CFR 240.14a-9. Furthermore, this subsection allows the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.  

Cabela’s argued Trinity’s proposal should be excluded under Rule 14a-8(i)(7) because the sale of guns by a retailer constituted “ordinary business.”  Like many larger companies, Cabela’s sells tens of thousands of products without a primary focus on handguns. As a result, the sale of a particular product by a retailer constituted “ordinary business.” Trinity disagreed, arguing that the proposal related to a significant policy issue, namely the impact of selling high-capacity firearms on “people, communities and the environment” rather than “ordinary business” operations.  

Cabela’s also argued Trinity’s proposal should be excluded under Rule 14a-8(i)(3) because it asserted a policy concern that was inherently vague. Cabela’s further argued that if the proposal were to be included in the proxy materials, the shareholders would not be able to properly determine the scope of the proposal, and as a result, Cabela’s would not be able to properly implement the proposal. Trinity, however, argued that Cabela’s should not be able to exclude the proposal due to vagueness because the proposal adequately specifies the class of firearms at issue. 

Ultimately the SEC agreed with Cabela’s, and concluded it would not recommend enforcement action if Cabela’s omitted the proposal from its proxy materials. The SEC justified this determination under Rule 14a-8(i)(7), and thus, did not comment on any arguments raised relating to Rule 14a-8(i)(3).  

The primary materials for the post can be found on the SEC Website

Monday
Mar062017

CFTC v. Deutsche Bank AG: Court Order Demands Further Argument Before Considering Consent Motion. 

In CFTC v. Deutsche Bank AG, No. 1:16-cv-06544-WHP, 2016 BL (S.D.N.Y. Sept. 22, 2016), the Court considered a Consent Motion sought on behalf of the U.S Commodity Future Trading Commission (“CFTC”). The proposed Consent Motion requested a preliminary injunction, appointment of an independent monitor, and other equitable relief. Instead of giving a ruling on the proposed Consent Motion, the Court issued a further order directing the Plaintiff, CFTC, to file a memorandum citing authority supporting the proposed Consent Order. Specifically the Court requested the CFTC to marshal authority to explain why the Consent Order would be “fair, reasonable, adequate, and in the public interest.”

This action commenced on August 18, 2016 when CFTC filed a complaint against Deutsche Bank AG for (1) permanent injunction, (2) civil penalties and, (3) other equitable relief for violations of the Commodity Exchange Act, 7 U.S.C. §§ 1-26 (2012), and the Commission’s Regulations, 17 C.F.R. 1.1. Additionally, on August 18, 2016, CFTC filed a Proposed Consent Motion. In response to this Motion, the Court issued the Order at the heart of this discussion.

A consent order should be “fair, reasonable, adequate, and in the public interest.” Citigroup Global Mkts., Inc., 753 F.3d 285, 294 (2d Cir. 2014). Furthermore, regulatory agencies such as CFTC should be afforded deference. Consumer Financial Protection Bureau v. Sprint Corp., No 14-cv-9931 (WHP), 2015 WL 3395581 (S.D.N.Y. May 19, 2015).

The Court ruled that the minimum legal threshold for granting a Consent Order had not been established. Here the Court acknowledged the substantial deference that is granted to enforcement agencies in proposing a consent motion. Yet, the Motion submitted by CFTC did not provide an argument as to why an order would be fair and reasonable. Rather it simply resembled what the CFTC would envision the Consent Order to look like. As such, the Court issued an Order for the CFTC to bolster its Motion.

The Court conducted a hearing on October 6, 2016 to consider entry of the proposed consent order.

The primary material for this case can be found on the DU Corporate Governance Website

Wednesday
Mar012017

Lanier v. Bats Exch. Inc.: Appellate Court Upholds SRO’s Motion to Dismiss

This is one of two posts discussing Lanier v. Bats Exch. Inc., 838 F.3d 139  (2d Cir. 2016). This post will specifically cover the breach of contract claims. The second post covers subject matter jurisdiction.

In Lanier v. Bats Exch. Inc., 2d Cir., No. 15-1683 (2d Cir. Sep. 23, 2016), the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of Harold Lanier’s (“Plaintiff”) breach of contract claims against a group of national securities exchanges (“Defendants”) for failure to state a claim.

National security exchanges are self-regulatory organizations (“SRO”) subject to the Securities and Exchange Commission’s (“SEC”) approval and oversight. The SEC has the authority to revoke their status as SROs. The national exchanges are required to comply with the SEC’s rules and regulations, including those addressing the distribution of “[i]nformation with respect to quotations for or transactions in any security.” The quotation and transaction information must be distributed “on terms that are not unreasonably discriminate.”

According to the complaint, Plaintiff contracted with Defendants to receive consolidated data via a securities information processor about securities traded on the Defendants’ exchanges. Plaintiff alleges that Defendants disseminated the same market date sent to the processor directly to a group of preferred customers and, due to the preferred customers’ bandwidth, transfer protocol, and physical location of servers, these customers received data as quickly as “one microsecond” after the data was sent. Plaintiff claimed the preferred customers benefited from the speed at which they received the market data.  Plaintiff and other similarly positioned traders (collectively “Subscribers”), in contrast, received stale data. Plaintiff alleged Defendants breached their contracts because the preferred customers received market data up to 1,499 microseconds faster than Subscribers.

Plaintiff argued Subscribers should have received market data prior to or at the same time as the preferred customer to be fair and nondiscriminatory. The court disagreed and noted that the SEC appeared to interpret the requirement to mean data must be sent at the same time, not received. Moreover, the court found that if Plaintiff’s theory were allowed, it would undermine Congress’ intent to create uniform rules for governing the national market system, a task given to the SEC. Thus, Plaintiff’s interpretation of the contracts was preempted.

The court next turned to the breach of contract claims. To plead a breach of contract claim, the claim must have been premised on failure to fulfill contractual obligations independent of the obligations imposed by the SEC. The court failed to find any basis in the contract for the allegation that the preferred customers could not receive data prior to the processer. Nor could the contract be read to require that the processor be a “single source” of the NBBO. As the court concluded: “As Lanier has failed to identify any contractual promise independent of the relevant regulations that was breached by the prior receipt of data by Preferred Customers, he has failed to state a claim for breach of contract.”

Finally, the court found Plaintiff failed to exhaust all remedies at the administrative level. Under the exhaustion rule, a party may not seek federal judicial review of an adverse administrative determination until the party has first sought all possible review with the agency itself. The court noted Plaintiff still had the right to seek review before the SEC of any breach of contract claim. Consequently, the Plaintiff’s claims were not ripe for review.

Accordingly, the court affirmed the district court’s ruling and dismissed the complaint for failure to state a claim.

The primary materials for this case may be found at the DU Corporate Governance website

Wednesday
Mar012017

The U.S. District Court for the Northern District of California Denies Fitbit’s Motion to Dismiss Investors’ Exchange Act Violation Claims

This post is one of two posts discussing Fitbit’s allegedly false marketing claims regarding its heart rate monitoring devices. This post will specifically focus on claims made under the Securities Exchange Act of 1934 (“Exchange Act”). The other post covers claims made under the Securities Act of 1933.

In Robb v. Fitbit, Inc., et al., No. 16-cv-00151-SI 2016 BL 359028 (N.D. Cal. Oct. 26, 2016), Plaintiff Brian Robb filed a class action lawsuit on behalf of all persons who acquired Fitbit securities prior to the drop in Fitbit’s stock value, which was allegedly caused by inaccuracy of its heart rate monitors. Fitbit Inc. and Fitbit control persons James Park, William Zerella, and Eric Friedman, (collectively “Defendants”) filed a motion to dismiss claims made against them under the Exchange Act in connection with Fitbit’s marketing of its heart rate monitoring devices and its initial public offering (“IPO”). The district court denied the Defendants’ motion to dismiss and determined the plaintiff class (“Plaintiffs”) sufficiently alleged material misrepresentation or omission, scienter, and loss causation actionable under the Exchange Act.

According to the allegations, Fitbit in October 2014 announced its new “heart rate technology” and advertised heavily that it would be featured in two products. A January 2015 press release described the technology as superior tracking that “works no matter what you’re doing.” In June 2015, Fitbit completed its IPO with net proceeds reaching approximately $416 million. The IPO Prospectus described the new products as key revenue drivers. The sales of these devices led Fitbit’s revenues to reach $1.858 billion in 2015, up from $745.4 million in 2014. In August 2015, defendant Park made statements that the heart rate technology took many years to develop and Fitbit only launches products “when we feel they’re ready.” 

On January 5, 2016, Fitbit purchasers filed a class action lawsuit alleging inaccuracy of the heart rate monitoring technology, and on the same day, Fitbit’s stock dropped from $30.96 per share to $24.30 per share. On May 19, 2016 purchasers filed an amended complaint including study findings of the product’s inaccuracy and by that day’s closing Fitbit’s stock fell to $13.99 per share.

Plaintiffs filed the current lawsuit alleging Defendants violated Section 10(b) of the Exchange Act by making, knowingly, or with deliberate recklessness, misstatements and/or failing to disclose information about the technology’s inaccuracy. Plaintiffs asserted the impact of these products on Fitbit’s revenue motivated investment and gave Defendants incentive to inflate the devices’ performance. Two confidential witness statements from Fitbit data contractors reported Fitbit’s internal testing revealed the heart rate technology was inaccurate. Plaintiffs further alleged violations of Section 20(a) of the Exchange Act against the “control persons” by virtue of their roles in the company.

Defendants filed a motion to dismiss both claims on the basis that the Plaintiffs failed to sufficiently allege misstatements, scienter, and loss causation.

Section 10(b) of the Exchange Act prohibits any act or omission resulting in fraud connected with securities transactions. A plaintiff asserting a Section 10(b) claim must adequately allege the defendant’s material misrepresentation or omission, scienter, and loss causation. Section 20(a) of the Exchange Act holds “control persons” liable for violation of Section 10(b).

The court determined the alleged misstatements concerning the accuracy of the Fitbit products made in press releases and by control persons were statements upon which a reasonable investor would rely and were sufficient to state a claim for material misrepresentation. With respect to scienter, the court rejected Plaintiffs assertion that knowledge of the products “limited accuracy” could be inferred from the personal use of the device by some of the Defendants.  “Though defendants may have used the devices to track their own heart rates, there is no indication that they had any metric against which to compare these measurements in order to determine their accuracy. Their mere use of the devices thus fails to establish defendants' knowledge of inaccuracy and, taken individually, does not prove scienter.”

The court did, however, find that the statements by the confidential witnesses were sufficient to plead scienter. “In addressing the first prong of the CW analysis, both CW 1 and CW 2 held positions that exposed them directly to data and consumer complaints on the Charge HR and Surge, establishing their reliability and personal knowledge of the alleged inaccuracies. Second, both CW 1 and CW 2 reported directly to COO . . . indicating scienter by Fitbit executives.”

Finally, the court determined the correlation between the timing of the lawsuit questioning Fitbit’s technology and the drop in stock price was adequate to plausibly establish loss causation. Given these findings, the court held the Plaintiffs sufficiently alleged a claim for violation of Section 10(b), thus the claim for liability under Section 20(a) was also valid. Accordingly, the court denied the dismissal of either claim.

The primary materials for this case can be found on the DU Corporate Governance website.

Monday
Feb272017

Moreno v. Deutsche Bank: Employees Sufficiently Plead Claims for Breach of Fiduciary Duty and Prohibited Transactions

In Moreno v. Deutsche Bank Am.s Holding Corp., No. 15 Civ. 9936 (LGS), 2016 BL 342731 (S.D.N.Y. Oct. 13, 2016), the United States District Court for the Southern District of New York denied in part and granted in part defendants’ motion to dismiss plaintiffs’ amended class action complaint against Deutsche Bank Americas Holding Corp. (“DBAHC”), DBAHC Executive Committee, Deutsche Bank Matched Savings Plan Investment Committee (the “Investment Committee”), Richard O’Connell, Deutsche Investment Management Americas Inc. (“DIMA”), and RREEF America, LLC (“RREEF”) (collectively, “Defendants”). The court held that Ramon Moreno and Donald O’Halloran, individually and on behalf of those similarly situated (“Plaintiffs”), sufficiently pleaded claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. 

According to the allegations, Plaintiffs, from 2009 until February 2013, participated in the Deutsche Bank Matched Savings Plan (the “Plan”), a 401(k) plan with $1.9 billion in assets that offered Deutsche Bank employees various investment options. According to the complaint, the Plan included three proprietary index funds that charged excessive fees in relation to other comparable index funds managed by the Vanguard Group” and actively managed proprietary funds that charged fees up to five times higher fees than comparable funds.  The proprietary funds also allegedly underperformed “as measured by benchmark indices.”  For at least two of the proprietary funds, “the Plan was the only defined contribution plan among roughly 1,400 such plans with more than $500 million in assets to hold these funds.”

On December 21, 2015, Plaintiffs filed a complaint alleging Defendants were fiduciaries and that they breached their fiduciary duties of loyalty and care in selecting and managing the Plan investments. Plaintiffs alleged that the Plan’s inclusion of propriety funds resulted in prohibited transactions because DBAHC entities received monthly payment for services rendered to the funds. Moreover, Plaintiffs asserted that DBAHC, DIMA, and RREEF conducted prohibited self-dealing transactions by receiving consideration for investment services provided by DIMA and RREEF, subsidiaries of DBAHC.

Defendants moved to dismiss the complaint, arguing that the action was barred by ERISA’s statute of limitations, that Plaintiffs failed to state a claim, and that RREEF and DIMA lack fiduciary status.

Under 29 U.S.C. § 1104, a fiduciary owes duties of loyalty and care to act solely in the interest of the participants in the plan.  The standard looks to “whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.” Prohibited transactions between a plan and a common trust fund managed by a trust company which is supervised by a State or Federal agency are exempt under 29 U.S.C. § 1108(b)(8) if: (1) the transaction involves selling or purchasing fund interests; (2) the trust company is not overcompensated; and (3) the transaction is expressly permitted by an authoritative party.     

The court held that Plaintiffs’ claims were not barred under ERISA’s statute of limitations, 29 U.S.C. § 1113, because, according to the allegations, Plaintiffs did not have actual knowledge of the violations until shortly before the complaint was filed. Next, the court found that Plaintiffs plausibly alleged that Defendants violated the obligation of care by including excessively costly proprietary funds in the Plan.  “Equally important, the Complaint alleges that Defendants stood to benefit from the alleged excessive fees because Deutsche Bank entities were paid investment management fees by these proprietary funds.” 

With respect to the statute of limitations, the court disagreed with Defendant contention that the period had begun when the initial decision was made to include the proprietary funds in the Plan.  Instead, the court noted that the Complaint alleged that the prohibited transactions were periodic service fees paid to Deutsche Bank entities. 

The court, however, agreed with Defendants’ assertion that DIMA and RREEF lacked fiduciary status under 29 U.S.C. § 1002(21)(A) because the complaint failed to sufficiently allege that DIMA and RREEF were compensated for providing investment advice that influenced the Plan’s investment decisions.

For the above reasons, the court dismissed DIMA and RREEF from the action and denied Defendants’ motion to dismiss. 

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Feb242017

Lanier v. BATS Exch. Inc.: Court Finds It Has Proper Subject Matter Jurisdiction

This is one of two posts discussing Lanier v. BATS Exch. Inc., 838 F.3d 139 (2d Cir. 2016). This post will specifically cover subject matter jurisdiction. The second post covers failure to state a contract claim.

In Lanier v. BATS Exch. Inc., 2d Cir., No. 151683 (2d Cir. Sep. 23, 2016), the United States Court of Appeals for the Second Circuit held it had proper subject matter jurisdiction to consider the claims.

Defendants, national Securities Exchanges (the “Exchanges”), provide information about securities traded on the Exchanges to an exclusive securities processor (“Processor”) pursuant to Regulation National Market System (”Reg NMS”). Reg NMS standardizes the dissemination of market information by all exchanges trading U.S. securities under the authority of the Securities and Exchange Commission (“SEC”). The Processor consolidates data and makes it available to subscribers (“Subscribers”), who pay fees for access. The Exchanges also provided access to market data on proprietary distribution channels to customers who paid higher fees (“Preferred Customers”) than standard Subscribers. According to the complaint, Preferred Customers could access market data up to 1,499 microseconds faster than Subscribers due to the difference in processing time between the two services, and therefore trade on the data earlier.

Harold Lanier, on behalf of himself and others similarly situated (collectively, the “Plaintiffs”), filed suit against the Exchanges alleging that the Exchanges had breached their contract with the Plaintiffs by providing preferentially fast access to the Preferred Customers. The Exchanges argued that the district court lacked subject matter jurisdiction because the Plaintiffs were required to seek SEC review of their claims first, and then appeal any adverse decision directly to the court of appeals.

A district court lacks subject matter jurisdiction to hear claims when Congress creates a comprehensive regulatory scheme where it is fairly discernable Congress intended agency expertise would be brought to bear prior to any court review. In determining whether Congress implicitly precluded federal district court jurisdiction, the court must first determine if preclusion is discernable from the text, structure, and purpose of the statute. Second, the court must then decide whether the claim is of the type Congress intended to be reviewed within the statutory structure. Tilton v. Sec. & Exch. Comm’n, 824 F.3d 276, 281 (2d Cir. 2016). This second step is guided by three factors: (1) whether “a finding of preclusion could foreclose all meaningful judicial review”; (2) whether the suit is “wholly collateral to a statute’s review provisions”; and (3) whether the claims are outside of the agency’s expertise. Thunder Basin Coal Co. v. Reich, 510 U.S. 200, (1994).

The court elected not to address the first step of the Tilton analysis, as it determined the Plaintiffs’ contract claims are not the type Congress intended to be precluded from district court jurisdiction. Under the second step of the Tilton analysis, the court held the Plaintiffs’ claims were not “wholly collateral” because the claims were not substantively intertwined with the merits of an issue that, under the statute’s provisions, must first be heard by the SEC. The court further held that the SEC possessed no “agency expertise” that would make a district court less competent to hear the case, as the Plaintiffs’ claims are rooted in contract law, an area of law squarely within the district court’s competency. Finally, the court found the preclusion of district court jurisdiction would foreclose the Plaintiffs’ ability to obtain meaningful judicial review as the Plaintiffs principally seek monetary damages and the administrative review provisions of the Securities and Exchange Act do not provide for such damages.

Accordingly, the court held it had proper subject matter jurisdiction to hear the Plaintiffs’ claims.

The primary materials for this case can be found on the DU Corporate Governance website.

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